Second Shoe Drops, As Does Harmonic Stock

Harmonic Inc. confirmed investor fears last week, announcing that earnings for the second quarter would be sharply lower than expected.

The announcement sent the stock into its second tailspin of the month.

Harmonic president Anthony Ley told analysts in a conference call that earnings for the second quarter would be between 12 cents and 16 cents per share, primarily due to previously disclosed lower-than-expected sales to AT & T Corp.

"We are very disappointed in those results, but we are taking many of the right steps to get the company back on track," Ley said.

Earlier, analysts downgraded earnings estimates for Harmonic from 29 cents per share to 27 cents after Ley told a group of analysts at the recent "CIBC Oppenheimer Corp. Investor Conference" that second-quarter sales to AT & T were sluggish.

AT & T has been one of Harmonic's largest customers, purchasing the vendor's multiplexer nodes for its "LightWire" trials in Salt Lake City.

LightWire is a new system architecture that pushes fiber deep into the node, reducing the need for signal amplifiers and other components, while increasing throughput to customers.

AT & T, which accounted for more than 50 percent of Harmonic's sales in the third quarter of 1999, made up only about 28 percent of the vendor's sales in the first quarter of this year.

But the full impact was not known until Ley made his announcement June 26. Harmonic stock fell 69 percent between May 15 and 23, when it closed at $39 per share. But the stock appeared to be making headway, rising to $57.44 June 9.

The stock took another nosedive in after-hours trading June 26, dropping to $28 from its previous close of $40. Harmonic stock continued its slide June 27, closing at $23.31.

Josephthal & Co. Inc. analyst Lawrence Harris said that although the downturn in the AT & T business was greater than he expected, the real surprise was in Harmonic's convergent-systems division, which consists mainly of recent acquisition DiviCom Inc.

Harris said the AT & T business will likely come back-"It's just a question of which quarter"-mainly because other cable-equipment vendors he spoke to didn't anticipate similar downturns in sales to AT & T.

But convergent systems, which sells equipment to direct-broadcast satellite providers, could be another story.

Harmonic said it anticipates sales in the convergent-systems division to be between $20 million and $24 million in the quarter. Harris had estimated that sales at that division would be about $34 million in the quarter.

"That's a longer-term issue," he said. "Satellite accounted for 51 percent of DiviCom revenue in calendar 1999. We're not anticipating a short-term turnaround in the satellite portion."

Although Harris said the division has some potential in sales of digital headends to the international cable market, that market is still quite small.

He downgraded Harmonic stock to "hold" from "buy."

Harmonic said it expected to report overall revenue of $74 million to $82 million for the quarter. Revenue at the broadband-access-networks division, which makes fiber optic products for cable systems, is expected to be between $54 million and $58 million, compared with $36 million in the second quarter of 1999. Harris had expected that division to report $61 million in sales.

Harmonic is scheduled to release its second-quarter financial data July 19.

Although Ley said he did not expect sales to AT & T to return to the record levels of the third quarter of 1999, he added that Harmonic still considers AT & T a major customer, and has added several new MSOs as customers this year, including Charter Communications Inc. and Adelphia Communications Corp.

"Our core fiber-optic business remains strong and continues to grow worldwide," he added during the analyst conference.